Up until 2008, we find that the average absolute correlation has been fairly stable, with moderate jumps during the early 1980s recession, the 1997 Asian financial crises and the 2002 stock market downturn among others.
Since the Lehman collapse in 2008, we can see an increase, with correlation staying above 30% over a prolonged period of five years. More recently, correlation appears to have returned to “business as usual”, tending towards pre-crisis levels.
The correlation between assets in different sectors follows a similar pattern. This is unsurprising since there are many more between-sector relationships and so this data dominates the all assets result. This increase is present between nearly all sectors, but the most widely publicised change is between commodities and equity indices. While commodities have previously been regarded as a good diversifying asset class to an equities portfolio, this perception has changed in the recent crisis when correlations hit an all-time high. However, as before, this feature appears to be a temporary “blip”.
The correlation between futures within a sector has seen a different trend, with a slow rise over the last 40 years, and less of a marked change during the recent crisis. Markets have become increasingly electronic in the last 20 years, and a potential explanation is that this has created tighter linkages which drive this rise in correlation. Were this true, it would follow that the trend is unlikely to reverse.